Wednesday, January 03, 2007

Private liquor industry gets big gift from taxpayers

VICTORIA - Forget anything under your tree. The best present this year was given to private liquor stores by the B.C. government.
And you’re generously picking up the tab. The gift will cost taxpayers more than $20 million this year and keep on growing year after year.
The government quietly offered private liquor-store owners yet another price break before Christmas, cutting the prices they will have to pay for wine, beer and other alcohol by five per cent across the board. The lower prices start Jan. 28.
Great news for the private store owners and their shareholders. The change means an extra $20 million to $25 million for them.
The Liquor Barn Income Fund, one of two big new players pushing into the B.C. industry, said the government’s largesse will mean a 10-per-cent jump in its before-tax profits. Investors and executives should be thrilled.
Not so good for the rest of us. The price cut means $20 million less revenue for the government. That’s about 4,500 knee or hip replacements that could have been done, if the government hadn’t made improving the liquor industry’s profitability a priority.
Bear with me for a primer and some history. Private stores in B.C., for reasons not entirely clear, have to buy their stock from the government’s Liquor Distribution Branch. They get the goods at a wholesale price based on a discount from government liquor store prices.
When the Liberals decided to allow private stores in 2002, they set the discount at 10 per cent below the government store retail rate.
That was supposed to be enough to let the private operators thrive. A mark-up of $1 per six-pack seemed fair.
But the government messed up the introduction of private stores. It said government stores would be closing, a big factor for private-sector investors who saw a huge opportunity.
Then ideology crashed into reality. The Liberals realized how much revenue would be lost if they got out of the business and reversed their plan. The government stores would be staying open.
Good for them, bad for the private investors.
Rich Coleman, then solicitor general, was handed the job of cleaning up the mess. He decided in 2003 that the playing field could be levelled if the government increased the private store’s discount to 12 per cent. For a store doing about $2 million in sales, that meant an extra $40,000 in profits.
Not enough, the companies said. They got another increase in the discount in 2004, to 13 per cent.
This time they really scored. The industry convinced Solicitor General John Les, responsible for liquor sales, that it needed another break from government. He agreed to increase the disocunt from 13 to 16 per cent.
The profit for a typical store will jump by $60,000, thanks to the increased discount.
Les said the owners of private liquor stores argued government stores had an unfair advantage.
And the industry convinced him that it wasn’t making enough money, creating a risk of instability, he said. “This is really an effort to make sure that we had a balanced system,” he said.
Maybe the industry will pay higher wages with some of the money, he says, or reduce prices. You can wait and see after Jan. 28.
It’s tough to see why the government felt compelled to offer a cash bonus to the industry.
The people investing in private liquor stores knew the rules, including the discount level. If their businesses aren’t as successful as they hoped, that ‘s their problem. Other people can’t run to governmen for help.
And in any case, there is no evidence that the private stores aren’t doing just fine at the current levels.
Stores aren’t closing or laying of staff. In fact, the number of private stores jumped by more than 10 per cent in the last fiscal year.
The Liquor Barn managers said last spring they expected great growth in B.C. under the old discount rate.
Why are taxpayers giving the industry a $20-million gift?
Footnote: Les said he believes government liquor stores have an unfair advantage in that they are paying less for the product. That’s tough to establish and irrelevant. The people who invested knew the rules and went ahead. Taxpayers don’t owe them any special compensation now. Liquor profits will be worth about $800 million to government this year, up barely 2.4 per cent from the previous year.